While much of the world has benefited from international trade, some regions and individual citizens have been left conspicuously behind. This column summarises analysis from the WTO’s 2024 World Trade Report on the relationship between international trade and inclusiveness. The diverse impact of international trade across economies points more to the inadequacy of domestic policies accompanying the process of globalisation than to the process itself. International trade can raise wages and reduce poverty, but complementary domestic policies are required if it is to do so without increasing income inequality.
Much of the debate about globalisation and inclusiveness continues to be based on oversimplifications and misconceptions. One fallacy posits that international trade is detrimental to inclusiveness by favouring only wealthy economies and individuals, leaving behind marginalised groups and remote regions, further exacerbating inequality. This has amplified calls to protect domestic industries and jobs by limiting imports of goods and services (Di Tella and Rodrik 2019, Docquier et al. 2024). In reality, open trade has encouraged inclusiveness across and within economies (WTO 2024).
Trade and income converge
Over the past 30 years, many developing economies have made significant progress in closing the income gap with developed economies, although this progress slowed following the great financial crisis and even declined during the COVID-19 pandemic. From 1995 to 2023, inflation-adjusted per capita income in low- and middle-income economies nearly tripled (rising from US$ 1,835 to $5,337) while global per capita income increased by about 65% (from $7,050 to $11,570).
This unprecedented income convergence was associated with a steep increase in the participation of low- and middle-income economies in international trade (see Figure 1). Access to foreign markets for exports and imports and foreign direct investment (FDI) within global value chains (GVCs) have increased productivity, driven by economies of scale, competition, technology diffusion, and innovation.
Figure 1 Positive correlation between low- and middle-income economies’ convergence speed and trade participation, 1996–2021
Source: WTO (2024).
Using the WTO global trade model, the World Trade Report 2024 estimates that trade cost reductions between 1995 and 2020 led to a 6.8% increase in global real GDP over the period, with low-income economies growing by around 33%. Trade reforms accelerated the structural transformation of low- and middle-income economies, thereby contributing to income convergence. Unilateral trade reforms in developing economies have boosted economic growth by 1 to 1.5 percentage points on average (Irwin 2024). Multilateral trade reforms have also contributed to inclusiveness by promoting an open, rules-based, and predictable multilateral trading system. Membership of the General Agreement on Tariffs and Trade (GATT) and the WTO has boosted trade between members by 140% on average (Larch et al. 2024). WTO members that underwent a reform process as part of their WTO accession (known as Article XII members) also experienced an average growth rate that was 1.5 percentage points higher before they joined the WTO than other WTO members, and continued to grow faster after their accession to the WTO (Brotto et al. 2024) (see Figure 2).
Figure 2 Higher economic growth in WTO members with more extensive commitments
Source: WTO (2024).
Uneven inclusiveness across and within economies
However, global income convergence and trade integration have been uneven. Some economies, located mainly in Africa, the Caribbean, Latin America, and the Middle East have been left behind. Most of these economies exhibit relatively low trade participation hindered by restrictive trade policies, poor infrastructure, remote geographical location, and weak institutional frameworks. The WTO trade cost index shows that LDCs’ trade costs are 47% higher in manufacturing and 50% higher in services compared to high-income countries. Other economies that have been left behind are mostly commodity exporters, experiencing slow income growth and economic diversification despite relatively high trade participation.
Trade also affects people unevenly within a country. The net effect at the individual level depends on employment and consumption patterns (Fajgelbaum and Khandelwal 2016). The ability of workers to move from lower- to higher-productivity jobs, and from declining to growing sectors, is one of the main mechanisms by which trade increases overall economic efficiency and contributes to improving living standards (WTO 2017).
Yet, certain individuals – such as low-skilled workers in some sectors and informal workers – may struggle to adapt to import competition because they lack the skills needed in export-oriented industries or face mobility barriers that prevent them from relocating to more prosperous regions and benefiting from new job opportunities (Dix-Corneiro 2014). In the absence of adequate policy responses, the effects of labour market disruptions can last for long periods.
While all consumers benefit from trade openness through more affordable products and a wider variety of options, these consumption gains tend to benefit poorer segments of the population more significantly because they spend a relatively larger share of their budget on essential products. However, some individuals may not benefit from price reductions associated with trade openness due to high transport costs or uncompetitive sectors that increase their markups rather than lowering prices (De Loecker et al. 2016).
Overall, the impact of trade on inclusiveness has been very diverse across economies, pointing more to a lack of adequate domestic complementary policies accompanying the process of globalisation than to the process itself. International trade can contribute to raising overall incomes and reducing poverty without necessarily increasing income inequality. Some of the most open economies are also some of the most equal in terms of income levels.
A strategy of open trade and appropriate domestic complementary policies is required for greater inclusiveness
Trade protectionism neither protects the overall economy, nor supports overall inclusiveness.
While trade-restrictive measures may protect some sectors and jobs from import competition, they do so at a high cost for the rest of the economy, which faces higher prices, lower incentives for innovation, and reduced competitiveness in exporting industries. Trade-restrictive measures can also lead to retaliation from trading partners, potentially threatening jobs supported by trade. In addition, strategies to reshore certain manufacturing industries may not bring back many jobs because of automation and digitalisation.
While trade is part of the solution for a more inclusive economy, trade alone is not enough. Complementary domestic policies are needed to make trade more inclusive. Affected individuals can be supported, for example, through labour market policies (that reduce matching and switching costs, favour retraining, or address informality), investments in transport infrastructure to connect rural areas to main markets, policies that reduce finance gaps between small or large firms, and compensation policies.
Enhanced international cooperation is needed for more inclusive development
Concerns about the distributional impacts of trade have led to a growing number of trade agreements, including provisions explicitly related to inclusiveness within economies (see Figure 3). While it is too early to evaluate the effectiveness of some of these provisions, this development highlights how efforts to collect disaggregated data (e.g. firm-level, gender, employment, or household data) at national and international levels could enhance the ability to evaluate the impact of policies on different groups of the population, and to monitor and adjust them accordingly.
Figure 3 Increasing provisions on inclusiveness in trade agreements, 1990–2021
Source: WTO (2024).
Trade and domestic complementary policies for inclusiveness can be made more effective through international cooperation. In a world increasingly fragmented due to geopolitical tensions, maintaining an open and predictable multilateral trading system is essential to preventing the rollback of economic convergence and supporting greater inclusiveness.
Diversifying GVCs, increasing digital trade, and developing trade in renewable energies and in critical minerals for climate technologies can create new opportunities for low- and middle-income economies. But it is essential to confront trade costs in services, bridge the digital divide, tackle regulatory capacity and compliance issues, and address the dominant market positions of large digital firms if low- and middle-income economies are to take full advantage of these opportunities.
While the WTO deals with trade and trade policy, other international organisations focus on the complementary policies needed for trade to play its role in supporting inclusiveness. In that context, more coherent collaboration between international organisations is essential to magnifying each other’s positive impacts on inclusiveness across and within economies.
Source : VOXeu
